Should I purchase Real Estate in a Holding Company?
At Spire Mortgage Team, are asked on a daily basis about purchasing Investment Real Estate or Real Estate to support your business needs and how to structure those deals best. If you are a Real Estate Investor or a Small Busines Owner, there are two main questions that seem to come up every week:
Should I incorporate a Holding Company to hold my investment Real Estate?
Should I purchase my Real Estate in my Operating Company or should I purchase Real Estate in a Holding Company?
We should start by saying that these decisions can only be made with the guidance of your accountant, but we’ve listed a few thoughts for you to consider below! Always feel free to reach out to us directly at Spire Mortgage Team to evaluate your lending options as they relate to each scenario!
Personal Name vs. Holding Company?
Purchasing real estate through a holding company in Canada can offer several benefits for individuals and businesses. One of the main advantages is the ability to protect personal assets from liability. By owning property through a holding company, the company's assets, such as the property, are separate from the assets of the individual or business owner. This means that if there were to be an accident at the property and the Holding Company be sued or go into foreclosure, the owner's personal assets would not be at risk.
That being said, most lenders that allow a mortgage in the holding company's name require a personal guarantee from the "actual" borrowers. This means they could come after the guarantors if the "hold co" defaults on the loan. Therefore, it's essential to understand what the lender requires before deciding on buying property within a holding company.
Another potential advantage of purchasing real estate through a holding company is taking advantage of tax benefits. Holding companies are separate legal entities and, as such, are subject to different tax laws than individuals. For example, a holding company may be able to claim certain deductions on its tax return that an individual would not be able to claim. Also, holding companies can structure multiple properties under one ownership, which can be helpful in estate planning and wealth management.
Understanding the tax implications and advantages of purchasing Real Estate in a Holding Company needs to be discussed with an accountant. However, not all accountants specialize in Residential and Commercial Real Estate, so make sure to be clear about your goals and intention with Real Estate for your Business and your family when choosing the accountant you want to work with to structure your Real Estate Holding company.
Holding companies can also be useful for businesses looking to purchase real estate. For example, a business may wish to buy a commercial property for its operations but doesn't want to mix the liability of owning a building with the liabilities of its Business. Holding the property under a holding company can help protect business operations from liability with the building and vice versa.
Another benefit of holding companies is the ability to protect the ownership of the property in the event of the owner's death. If the holding company owns the property, it can be transferred to the beneficiaries of the estate without the need for probate, which can be a costly and time-consuming process.
It's not all rainbows and unicorns when it comes to mortgages for Holding Companies. Obtaining mortgage financing in the name of a holding company can be difficult and more expensive than obtaining financing in your personal name. A limited number of lenders are agreeable to loans in the name of a holding company, so it's crucial to ensure that you're working with a licensed mortgage broker to help ensure your loan will qualify at one of the lenders on that limited list!
Overall, purchasing real estate through a holding company in Canada can benefit individuals and businesses. By protecting personal assets from liability, taking advantage of tax benefits, and making estate planning and wealth management easier, holding companies can be a valuable tool for real estate investors in Canada.
Operating Company vs. Holding Company?
When buying real estate, many businesses wonder whether they should purchase the property through a Holding Company or an Operating Company. While both options have their own pros and cons, there are several reasons why buying real estate through a holding company may be the better choice.
One of the main benefits of buying real estate through a holding company is the protection of personal assets. A holding company is a separate legal entity from the individual or business owner, which means that the assets of the company, such as the property, are separate from the assets of the owner.
Another benefit of buying real estate through a holding company is the ability to take advantage of tax benefits. Holding companies are taxed differently than operating companies, which means they may be able to claim certain deductions on their tax returns or be taxed in a different tax bracket than an operating company. This is definitely a conversation to bring up with your accountant at your next meeting if your business if considering a purchase in 2023.
The deciding factor for many businesses considering purchasing a property in the name of their holding company vs. the name of their operating is mortgage financing. Obtaining a loan for a residential or commercial property in the name of a Holding Company is far more accessible than in the name of an Operating Company. In addition, most lenders in Canada do not want to take the risk that a mistake in business operations could lead to a lawsuit that takes the business and the owned property with it.
There are many advantages to purchasing a property in a Holding Company. Still, the only way to ensure that you and your business are making the best choices for financing a property is to ensure that you've consulted with a licensed mortgage broker and your trusted accountant.
